Shock! The Biden Administration plans to increase taxes later in 2021 as part of a larger legislative package. Many conservatives reflexively say this is going to slam the economy (and I don’t disagree, especially the way the Biden administration plans to go about it), but the point of this blog post is to argue that what is more harmful than high tax rates is high regime uncertainty. What I mean by that is that when policy is arbitrary and uncertain, that causes a bigger problem. I think that Mr. Trump’s tax cuts were good for America, especially the corporate tax cut, as the U.S. was previously at the top of the tax rate class for corporations–a big reason large corporations chose to domicile elsewhere. And–another shock–why large multinational firms often made most of their income outside the U.S., and kept it there!

But what really unleashed the U.S. economy (prior to Mr. Trump’s foolish trade war) was his massive deregulatory agenda, IMHO. Not just the deregulation itself, but the clear signal that the business of America was business–and it was very safe to get back in the water. This was in sharp contrast to the Obama Administration, which threatened entire industries with elimination. Now this interpretation is, of course, debatable. Yet every serious person would agree that regulations have costs as well as benefits, the only question is are there net benefits from any regulatory change? Progressives reflexively think of benefits of any new regulation, while conservatives “count the cost.” While good economics would tell you to include both the costs and benefits, good economics will also tell you the more you have of any good, the less the utility you will get from any incremental change–the principle of diminishing marginal utility. Further, the more of any good you purchase, you eventually get to a range of increasing costs. The point is that with any good, to include regulation, past a certain point not only do costs exceed the benefits, but costs are increasing at an increasing rate while benefits are decreasing.

Perhaps the most straightforward way to think about this is with the ultimate of government regulations: the decision to shutdown the global economy in response to Covid-19. However much you may believe in the benefits of those actions (which are debated vigorously), no one can deny the costs are catastrophic, and are likely to be very long-lasting. The lesson should be that big regulatory change should be avoided, and that to minimize costs one should slowly implement changes to allow the economy to prepare to change in the least costly manner possible.

So yes I do fear the negative impact of tax policies on our economy, but I’m much more concerned about the regulatory zeal that progressives plan to unleash on our economy.